Brunswick Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter ended June 28, 2014; comparisons are with the quarter ended June 29, 2013. The filing also reports six-month results. Brunswick manufactures and markets marine engines, boats, fitness equipment, and bowling and billiards products. Interim results are subject to seasonal variation.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,139.8 million | $1,098.3 million | $2,109.0 million | $2,093.6 million |
| Operating earnings | $141.3 million | $136.7 million | $236.0 million | $226.6 million |
| Operating margin | 12.4% | 12.4% | 11.2% | 10.8% |
| Net earnings | $88.6 million | $80.4 million | $145.6 million | $130.2 million |
| Diluted EPS, continuing operations | $0.93 | $0.85 | $1.53 | $1.43 |
| Gross margin | 27.8% | 27.5% | 27.6% | 26.9% |
- Cash flow: First-half operating cash flow from continuing operations was $77.0 million, versus $107.0 million. Capital expenditures were $52.9 million, versus $61.3 million; company-defined free cash flow was $27.3 million, versus $53.6 million.
- Cash and debt: At June 28, cash, cash equivalents, and short-term investments totaled $335.0 million; total debt was $458.0 million and net debt was $123.0 million. Total liquidity, including available borrowing capacity, was $628.8 million. The company had $293.8 million available under its $300 million facility and reported compliance with its financial covenants.
- Other balance-sheet measures: Total assets were $3.035 billion and shareholders’ equity was $1.187 billion. Inventory was $666.5 million. Restricted cash was $18.6 million.
Changes versus comparable periods
- Q2 sales rose 3.8%; first-half sales rose 0.7%. Q2 operating earnings increased 3.4%, and first-half operating earnings increased 4.1%. Higher gross margins and lower restructuring charges supported earnings.
- Q2 diluted continuing-operations EPS increased to $0.93 from $0.85; first-half EPS increased to $1.53 from $1.43. GAAP results in 2013 were affected by a $32.3 million Q2 debt-extinguishment loss; no comparable charge occurred in 2014.
- The effective tax rate rose to 34.0% from 13.0% in Q2 and to 34.3% from 20.1% for the first half, largely because the company had released substantial deferred-tax valuation allowances in 2013. Management’s adjusted continuing-operations diluted EPS measure declined to $0.95 from $1.23 for Q2 and to $1.56 from $1.99 for the first half, primarily reflecting the higher tax rate. These adjusted figures are non-GAAP.
- Segment trends were mixed: first-half Marine Engine sales were nearly flat and operating earnings declined; Boat sales and earnings rose, helped by mix, margins, and lower restructuring costs; Fitness sales increased and first-half earnings improved, although Q2 earnings declined; Bowling & Billiards first-half sales and earnings declined.
- Net debt increased from $90.6 million at year-end 2013, mainly as cash declined, but was below $142.2 million a year earlier. First-half cash generation was lower, notably due to working-capital use, including higher receivables and inventory.
Outlook, commentary, and material events
- Management forecast 2014 revenue growth of 5% to 6% versus 2013, with stronger revenue growth in the second half. It expected higher pretax earnings from revenue growth and improved gross margins, while operating expenses were projected to increase in dollars but decline slightly as a percentage of sales.
- Management expected a 2014 effective tax rate of about 34%, which it said would weigh on full-year EPS versus 2013. It forecast 2014 free cash flow of $100 million to $135 million, capital expenditures of approximately $140 million, and working-capital cash use of $40 million to $60 million.
- Expected 2014 pension contributions were approximately $50 million to qualified plans and $2 million more to the nonqualified plan. Possible pension lump-sum or annuity actions could require an additional $25 million to $30 million.
- Management cited continued strength in outboard engines and boats, marine parts and accessories, and U.S. fitness demand, but noted weak sterndrive/inboard categories, mixed international markets, and adverse first-quarter North American weather. It also identified consumer spending and credit, dealer financing, inventory and repurchase exposure, warranty and product liability, pension funding, foreign exchange, commodity costs, regulation, and weather as risks.
- In June, Brunswick acquired marine systems supplier Whale for $29.1 million net cash consideration. In July, after quarter-end, it agreed to sell its retail bowling business for $270 million and announced plans to divest its bowling-products business. Those businesses were expected to be reported as discontinued operations beginning in Q3 2014. The board also declared a $0.125-per-share dividend payable in September.
- Restructuring charges were $3.1 million in the first half, versus $9.6 million. Management anticipated a further $1 million to $2 million of 2014 charges, primarily for prior Boat-segment actions; it projected annual savings from specified restructuring initiatives.
Important facts for investors to verify
- Whether the projected 5%–6% full-year sales growth and $100 million–$135 million free-cash-flow range were achieved, including the effect of seasonal working-capital release.
- How the approximately 34% tax rate affected full-year earnings and whether the gap between GAAP and adjusted EPS measures persisted.
- Execution, proceeds, timing, and financial reporting treatment of the bowling-center sale and planned bowling-products divestiture.
- Marine and fitness segment demand, margins, and returns on increased strategic investment, alongside ongoing weakness in sterndrive/inboard markets.
- Dealer financing guarantees and product repurchase obligations, pension funding needs, and compliance with credit-facility covenants.